SAINT JOSEPH COLLEGE, MAASIN, LEYTE

Maasin City, Southern Leyte

BACHELOR OF SCIENCE IN BUSINESS ADMINISTRATION

Module III (Pre-Final)

For
Econ 0 – Applied Economics
First Semester, AY 2022-2023

Prepared by

Mr. Nilo L. Bia, Jr., MBA

Instructor

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Course Description

This course deals with the basic principles of applied economics, and its application to
contemporary economic issues facing the Filipino entrepreneur such as prices of
commodities, minimum wage, rent, and taxes. It covers an analysis of industries for
identification of potential business opportunities. The main output of the course is the
preparation of a socioeconomic impact study of a business venture.

Grading System

Each student shall be assessed on the following:

Pre-Midterm/Pre-Final Examination ------------------------------------ 20%

Midterm/Final Examination ---------------------------------------- 20%
Activities/Oral Examination and Class Participation ----------------- 30%
Quizzes, Exercises, and Assignments ------------------------------------ 30%
TOTAL: 100%
Learning Outcomes

At the end of the semester, the students must be able to:

1. Apply different terms in applied economics and recommend in their own simple ways
on helping
alleviate economic problems;
2. predict the possible outcomes of different situations based on their understanding of
applied economics;
3. Show computations applying the concepts of the law of supply and demand,
quantity, and equilibrium price;
4. Construct a diagram explaining the different market structures and how they can
contribute to contemporary issues;
5. Formulate a SWOT analysis for different business opportunities;
6. Conduct a survey of macro and micro environments affecting local businesses; and
7. Predict the outcomes of a possible business venture based on the different socio-
economic factors that might affect it.

Module 3

THE MARKET: DEMAND, SUPPLY, AND EQUILIBRIUM

Topic:

Lesson 1: Law of Demand and the Determinants of Demand

Lesson 2: Law of Supply and the Determinants of Supply
Lesson 3: Market Equilibrium and Disequilibrium

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Module Objectives
At the end of the lesson, you should be able to:

1. describe the application of the law of demand and supply

2. explain the demand function, demand schedule and demand curve
3. explain the supply function, supply schedule and supply curve
4. discuss the different determinants of demand
5. discuss the different determinants of supply
6. analyze the market demand, market supply and market equilibrium

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 Lesson
Law of Demand and the
1 Determinants of Demand

Demand is an important concept in economics that every entrepreneur ought to recognize.

The profitability and sustainability of an enterprise relies upon the existence of demand for a
good or service.

This lesson helps you understand the law of demand and identify determinants that change
the demand.

Demand is a schedule that shows the quantity of goods or services that consumers
are willing and able to buy given a list of possible prices during a specific period.

There are different ways to present the demand for a good or a service.

1. Demand function shows the relationship between the demand for a goods and the
factors that determine or influence this demand. The inverse relationship between
price and quantity demanded is given in an algebraic expression.
2. Demand schedule is a table that shows the relationship of prices and specific
quantities demanded at each of these prices. Demand schedule may be obtained
by substituting values for P (price) in the given demand function and solving for Qd
(quantity demand).
3. Demand curve is a graphical representation showing the relationship between the
prices and quantities demand per time period. The demand curve has a negative
slope which indicates the inverse relationship between price and quantity
demanded.

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Example:
Complete the demand schedule for Product X during the month if the demand function
is Qd = 400 − 3P. Plot the demand schedule in a graph to present the demand curve.

Demand Schedule Demand Curve

P Qd
Demand Curve for Product X during
the Month
₱50 250
300
70 190 250
200

PRICE
90 130 150
100
110 70 50
Solution: 0
130 10 50 70 90 110 130
Qd = 400 − 3P
= 400 − (3 × 50) Quantity Demand
= 400 − 150
Qd = 250

Qd = 400 − 3P
= 400 − (3 × 130)
= 400 − 390
Qd = 10

LAW OF DEMAND
The law of demand states that, ceteris paribus or all else being equal, people tend to
buy more at lower prices and less at higher prices (Cruz 2017).

LAW OF DEMAND

Figure 1: Law of Demand

Source: ©2019 Michael K. Powell

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 Determinants of Demand
1. Consumer Taste and Preferences
 This relates to the personal likes and dislikes of consumer for a certain good
or service and this could be brought about by means of various factors
including character’s age, sex, health condition, religion, culture, way of life,
and changes in technology
 There will be an increase in demand for a good when it is popular. However,
if the good is no longer popular or liked, then the demand for that good will
decrease.
2. A Change in Income
 A change in people’s income can change demand. An increase in people’s
income will often lead to an increase in demand. However, if incomes go
down, consumers will buy less, which will lead to a decrease in demand.
(Powell 2019)
 A normal good is a good whose demand rises as income increases
 An inferior good is a good whose demand falls as income rises

3. Population Change (Number of buyers)

 Population can also affect the demand for a good. If there is an increase in
number of people, then there will likely be an increase in demand (Powell
2019).
4. Price of Related Goods
 The price of a substitute or a complement is also important in assessing how
the demand for a good or a service may change.
 Substitute goods are goods that are interchanged with other goods and
generally offered at a cheaper price making these more attractive for buyers
to purchase.
 Complementary goods are goods that are used together. In other words, one
good cannot exist without the other good. Example would be ink cartridges
are used with printers (Cruz 2017).
5. Expectations of Future Prices
 If consumers expect for a price of good to rise (or fall) in the future, it may
result for the current demand to increase (or decrease).
 Expectations about the future may also alter the demand for a specific
product.

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 Lesson
Law of Supply and the
2 Determinants of Supply

This lesson helps you understand the law of supply and explain the determinants that change
the supply.

Supply is the quantity of goods or services that an enterprise is able and willing to
produce for sale to consumers. The supply for a good or a service may be presented using
supply function, supply schedule, and supply curve. The supply schedule may be obtained
by substituting values for P (price) in the given supply function and solving for Qs (quantity
supply).

Example:

Complete the supply schedule for Product X during the month if the supply function
is Qs = −150 + 4P. Graph the supply schedule to present the supply curve.

Supply Schedule Supply Curve

P Qs
Supply Curve for Product X during
₱100 250 the Month
600
120 330 500

140 410 400

PRICE

300
160 490
200

180 570 100

0
100 120 140 160 180
Solution:
Quantity Supply

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LAW OF SUPPLY
The law of supply states that the sellers will sell more at a higher price (Cruz 2017).

Figure 2: Law of Supply

Source: ©2019 Michael K. Powell

Determinants of Supply
1. Changes in the Number of Sellers
 When there are more sellers in the market, the higher is the supply of a good
or service.
2. Changes in Resource Price
 The cost of production of a good affect the supply in the market. When the
factors of production that is used to manufacture a product or good
increases, the manufacturer opt to decrease the supply.
3. Changes in Technology
 The use of new technology affects the amount of supply a business will
produce. The use of new technology tends to lower the cost of production
which results to higher profit for the business. If the profit is high, the
business will produce more supply.
4. Prices of Other Goods
 An increase in the price of other goods (a good that requires the same input
and technology) can influence the production decision of a firm. The firm
may opt to produce more supply for a good with high price and less supply
for a good with a lower price.
5. Taxes and Subsidies
 When the government imposes a tax on a business, this will result to an
increase in the cost of production. An increase in the cost of production will
lead to a decrease in supply because of a decrease in profit. However, when
the government decides to provide a subsidy to a business, this will lead to
increase in supply. This is because subsidy serves as an incentive for a
business.

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 6. Price Expectation
 When the supplier anticipate a changes in price, government policies, and
growth in the economy to happen in the future, the tendency is for them to
supply less than what they would have and wait until such time that they
could sell their product at a higher price.
7. Exportation and Importation
 Exportation leads to decrease in supply while importation leads to an
increase in supply.
 Removing quotas and tariffs on imported products also affects the supply.
Lower trade restrictions and lower quotas or tariffs increases imports
resulting to an increase in supply of goods in the market.
8. Natural Calamities and Disasters
 Natural calamities and disasters like typhoons and floods can destroy our
agricultural products which results to shortage in supply during that time.

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 Lesson
Market Equilibrium
3
This lesson combines the concepts of demand and supply. The meeting of supply and demand
results to what we referred to as market equilibrium.

 Market equilibrium exists when quantity demanded equals quantity supplied.

 Equilibrium price is a price where both consumers and producers accept and agree on it.
This can be solved algebraically by equating the demand and supply functions.
 Equilibrium point is where the demand and supply curves intersects.
 Shortage is a condition in the market in which demand is higher than supply
 Surplus is a condition in the market in which quantity supplied is higher than the quantity
demand

Example:

A. Complete the demand and supply schedule using the given demand and supply
functions: Qd = 320 − 2P and Qs = −130 + 3P. Show your complete solution.
B.
Demand and Supply Schedule
Price QD QS

50 220 20

60 200 50

70 180 80

80 160 110

90 140 140

100 120 170

130 60 260

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 Solutions:

Qd = 320 − 2P Qs = −130 + 3P
= 320 − (2 × 50) = −130 + (3 × 50)
= 320 − 100 = −130 + 150
Qd = 220 Qs = 20

Qd = 320 − 2P Qs = −130 + 3P
= 320 − (2 × 130) = −130 + (3 × 70)
= 320 − 260 = −130 + 210
Qd = 60 Qs = 80

C. Plot the demand and supply curves in the same graph. Use different color for each
curve.

Equilibrium point
PRICE

Quantity Demand
Quantity Supply

Equilibrium Price

D. What is the equilibrium price (Pe)?

QD = QS
320 − 2P = −130 + 3P
3P + 2P = 320 + 130
450
Pe =
5
𝐏𝐞 = 𝟗𝟎

E. What is the equilibrium quantity (Qe)?

Qe = 320 − 2P
Qe = 320 − (2 ∗ 90)
𝐐𝐞 = 𝟏𝟒𝟎

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